Flexible financing to scale piped water access

The private water supply market in Cambodia is highly fragmented, making it challenging to increase coverage across underserved rural areas. Khmer Water Supply Holding is consolidating expertise to overcome this issue at scale, as its General Manager William Puyo explains in this blog.

In 2020, nearly 80% of Cambodia’s urban population had access to piped water – a huge success considering that two decades before the number was just 36%. However, progress has not been reflected in the rural and semi-rural areas where three-quarters of the country’s nearly 17 million population live. Here, piped water access is dramatically lower, at just 17%.

But the sector is trying to address that – more than 400 private water operators have developed small, piped water stations in rural areas. Many lack technical, operational and financial expertise, and most lack the funds needed to expand coverage. This fragmentation makes it difficult to find operational and cost synergies, apply consistent standards and deploy large-scale financing which could generate important social gains as well as steady financial returns.

Khmer Water Supply Holding (KWSH) was created in 2013 in order to acquire underperforming stations, improve production and distribution performance, and invest intelligently to increase capacity.

We set up the venture because we saw there were no other actors seeking to consolidate the sector, so our business model offered an opportunity for private finance to find one reliable partner through which to make larger investments.

Our approach is to concentrate key management and technical expertise centrally in the Holding Company. We then allocate these to stations in our portfolio to systematically implement best practices in areas such as drinking water standards as well as to maximise social and commercial value.

On inception, we relied on funds from founding shareholders Insitor Partners and OBOR Capital. With those funds, we acquired two underperforming stations in 2014 and 2016. This initial portfolio demonstrated KWSH’s ability to improve performance and to deliver a predictable revenue base to support our first debt fundraise.

At this stage, we were unable to take on longer-term loans, because we remained small. Short-term loans are not well suited to the needs of water utilities, which require significant upfront investment to expand piped networks and increase treatment capacity. It can then take several years to connect households in the area and allow consumption volumes to grow, after which a station reaches maturity and can support debt servicing.

Recognising the difficulty we faced, as well as the potential in our model, the Stone Family Foundation loaned to KWSH, through two facilities, $1.1 million with 7-year tenors, including 4.5-year grace periods for principal repayments.

This gave us the patient capital required to invest and grow stations, and we now own five stations covering a total of more than 40,000 households. As of 2022, around a third of those households are connected to piped water, consuming more than two billion litres of water per year.

Excitingly, this has meant we have now reached a sufficient scale to attract the attention of Development Finance Institutions, who have very high minimum investment sizes.

KWSH is now closing nearly $10 million in new debt thanks to the faith of all those who previously backed this project. We are particularly grateful to the Stone Family Foundation for the catalytic and flexible terms provided, which served as a strong anchor in negotiations with the new investors.

This latest fundraise will trigger a new phase of rapid growth for KWSH, creating a virtuous cycle of increasing access to clean and reliable piped water – and supporting the delivery of the government of Cambodia’s ambitious plans to achieve SDG6.